◎ The CCP will find it very hard to return to negotiations in the current geopolitical climate.
Speaking to reporters at the White House on May 23, President Donald Trump said that “Huawei is something that is very dangerous. You look at what they’ve done from a security standpoint, from a military standpoint, it’s very dangerous.”
However, Trump suggested that Huawei could be part of a trade agreement with China. “If we made a deal, I could imagine Huawei being possibly included in some form or some part of it,” he said.
From Trump’s remarks, it appears that the recent U.S. ban on Huawei is at least partly aimed at bringing China back to the trade negotiation table after Beijing’s last-minute about-face in early May. Based on our research into Chinese Communist Party elite politics and operations, however, we believe that the odds of the Chinese regime returning to the table are slim to none.
The backdrop:
May 15:
- The U.S. Commerce Department placed Huawei Technologies Co Ltd and 70 affiliates to its “Entity List,” a move that bans Huawei from buying components and parts from American companies without the approval of the U.S. government.
May 17:
- China’s Ministry of Finance announces that Chinese firms in integrated circuit design and software industries will be exempt from paying income taxes in the first two years, starting in 2019, if they became profitable before the end of 2018. In the following three years, the companies need only pay half the 25 percent tax rate levied on Chinese firms.
May 19:
- U.S. chipmakers including Intel Corp., Qualcomm Inc., Xilinx Inc. and Broadcom Inc. have instructed their employees not to supply Huawei until further notice, according to a Bloomberg report. Google also cut off supplying hardware and some software services to Huawei.
- U.S. destroyer Preble sailed near the Scarborough Shoal in the South China Sea.
May 21:
- According to Bloomberg, the U.S. is considering adding Megvii, Zhejiang Dahua Technology Co., Hangzhou Hikvision Digital Technology Co. and two other Chinese tech companies to a blacklist which would see the companies banned similar to Huawei.
May 22:
- British chip designer ARM suspends business with Huawei, a move which threatens the Chinese firm’s ability to make its own chips.
- British mobile operators EE and Vodafone announced that they are dropping Huawei phones from their 5G launch plans.
- U.S. Treasury Secretary Steven Mnuchin said in a hearing before the U.S. House of Representatives Financial Services Committee that “there won’t be any decision probably for another 30 to 45 days” on imposing tariffs of 25 percent on $300 billion worth of Chinese goods.
- Mnuchin also said that the U.S. is open to new trade talks with China if both sides can proceed on the basis of previous negotiations.
- The U.S. destroyer Preble and the Navy oil tanker Walter S. Diehl sailed through the Taiwan Strait.
- State media China Daily publishes an editorial saying that China has shown “utmost restraint” but “with tensions between the two countries already rife, there is no guarantee that the presence of U.S. warships on China’s doorstep will not spark direct confrontation between the two militaries.”
May 23:
- Japan’s Panasonic announces that it is stopping all business transactions with Huawei and its companies subjected to the U.S. ban.
- NTT Docomo, Japan’s biggest carrier, is suspending pre-orders for a new Huawei phone due to the U.S. ban. Also, KDDI and SoftBank, Japan’s number two and three carriers, announced that they were delaying the release of Huawei phones as a result of the ban.
- In an interview with CNBC, U.S. Secretary of State Mike Pompeo said that Huawei is “deeply tied not only to China but to the Chinese Communist Party. And that connectivity, the existence of those connections puts American information that crosses those networks at risk.”
- When asked if more companies would stop working with Huawei, Pompeo said, “We do. We’ve been working at the State Department to make sure that everyone understands the risks.”
- In a press conference, China’s Ministry of Commerce spokesperson Gao Feng said, “If the United States wants to continue trade talks, they should show sincerity and correct their wrong actions. Negotiations can only continue on the basis of equality and mutual respect.”
Our take:
1. In an article on Jan. 21, we wrote: “Should the U.S. hit Huawei with a business ban and prohibit the sale of American microchips and other high-tech components to the CCP’s ‘national champion,’ then Huawei faces a real risk of bankruptcy. A crippled Huawei endangers the CCP’s high-tech ambitions and propaganda, the Belt and Road project, the regime’s plan for global 5G dominance, and military communications.”
And on March 27, we wrote: “Structural issues are very tricky for the CCP regime to handle. If Beijing refuses to compromise, it risks inviting crippling U.S. tariffs and sanctions. Most at risk are Chinese tech giants like Huawei, which faces the very real possibility of collapse should America go ‘all-in’ on sanctions and bring the Meng Wanzhou case to its logical conclusion. Yet if Beijing compromises and cannot delay making structural reforms (circumventing a U.S. trade enforcement mechanism and other tactics), then the regime faces an existential crisis.”
Our earlier analyses have either been verified or are on track to being verified with the recent Huawei ban.
2. Assuming that the Trump administration is insisting in carrying out fresh trade talks only on the basis of previous negotiations, then we believe that the Chinese regime will find it very hard to return to the negotiation table.
The Huawei ban has compounded three obstacles in the way of trade talks and a final deal. First, the CCP is naturally resistant to structural change and reforms due to existential reasons, but any Sino-U.S. trade agreement with the Trump administration would commit the CCP to make structural change and reforms. Second, CCP propaganda is shifting in a nationalistic direction, which makes it even harder for Beijing to restart the trade talks on U.S. terms. Finally, Xi Jinping’s political rivals (the Jiang faction and other Party interest groups) will almost certainly do anything in their power to undermine his leadership should new Sino-U.S. trade talks be held under the current situation (Huawei ban, talks on U.S. terms, insufficient “sincerity” shown by the Trump administration, etc.).
While the Xi leadership appears to be facing an impossible situation with regard to the trade talks, we do not think that further negotiations are doomed. Should Xi gain a distinct advantage in the CCP factional struggle, there is a possibility that Liu He could be sent back to the table to conclude the trade agreement.
Until the factional struggle tips more decisively in one direction, the CCP would likely default to its usual propaganda and influence tactics. For instance, the Chinese regime could play up nationalism at home (“century of humiliation,” self-reliance, etc.) while accusing the U.S. of “racism,” “xenophobia,” and provoking a “clash of civilizations.”
Meanwhile, the Trump administration could continue using “strong-arm” tactics on China to “convince” the Chinese regime that returning to the negotiation table and signing an agreement is the better option. For example, the U.S. could play the Taiwan card, confront the regime on its human rights abuses, and step up military operations in the South China Sea and the Taiwan Strait. We believe that the U.S. would ramp up the pressure on China even if a trade agreement is reached due to a long distrust of the CCP.
3. The Chinese regime’s move to give a 5-year tax break to integrated circuit design and software industries suggests that the CCP is planning not just for a lengthy trade war, but also to outlast the Trump administration.
We believe that the CCP will likely try to interfere in and influence the outcome of the 2020 U.S. presidential election. The CCP would step up overseas influence campaigns and seek to divide American society in the hopes of ousting President Trump and getting a more “China-friendly” candidate elected. Further, the Party might also have plans to sway the 2024 U.S. presidential election.
To play the long game, the CCP could be hoping that the trade war would adversely affect the U.S. economy and eventually force America to ease up the pressure on China. Meanwhile, the CCP could be preparing to step up “stability maintenance” operations on the mainland to keep the citizenry in check while blaming America for China’s woes to deflect the attention of the masses away from the Party. The recent effort to revitalize the All-China Federation of Supply and Marketing Cooperatives seems to be part of the CCP’s plans to partially “close up” China and weather the worst of the trade war. Ultimately, the CCP will do whatever it takes, including sacrificing the welfare of the Chinese people, to stay in power while withstanding U.S. pressure.
What’s next:
1. The U.S. could step up efforts to block Huawei worldwide and apply “maximum pressure” on the Chinese regime. Huawei might be able to survive by relying on the domestic market, but its global expansion plans will be severely affected. Semiconductor and software companies in America and elsewhere would also be affected by the Huawei ban.
2. As Sino-U.S. tensions ratchet up, both sides would likely step up military operations in areas such as the South China Sea. There is a risk of military accidents breaking out.
Get smart:
Businesses, investors, and governments need to be prepared for political Black Swan events occurring in China.
The U.S. is bound to suffer some pain (economic, social, political) in its confrontation with the Chinese regime. However, America can minimize and even avoid the pain if the U.S. government implements innovative solutions to target the CCP’s weaknesses. SinoInsider has low-cost and highly effective solutions to propose.
If the present trajectory of Sino-U.S. relations hold, 2019 will be a watershed year for both countries and China will see tremendous change.
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